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5 Best Ways To Achieve A Good Credit Score-And Land The Most Competitive Interest Rates

5 Best Ways To Achieve A Good Credit Score-And Land The Most Competitive Interest Rates

5 Best Ways To Achieve A Good Credit Score-And Land The Most Competitive Interest Rates

What is Credit Score?

Credit scores are 3-digit numbers revealed on every individuals credit report that represents the creditworthiness of a person. These 3-digit numbers are directly proportional to the credit amount you are eligible for.

Credit scores are a key factor that creditors use to determine a borrower’s risk before evaluating an interest rate. Those who have poor credit history have a higher risk of default, so to compensate for that risk, creditors assign those individuals a higher interest rate.

What are the costs associated when acquiring credit?

Your credit score also determines how much you will be charged for borrowing depending on how good your credit score is. Other charges include borrowing costs that you will be liable to pay when acquiring credit. These borrowing costs depend on the market interest rates and inflation rates both at that moment in time.

On the contrast, borrowers who have excellent credit scores have a low risk of default, so creditors are willing to offer them with the most competitive interest rates.

Credit Scores Calculation

To determine the borrower’s creditworthiness, creditors often use Fair, Isaac and Company (FICO) which ranges between 300 to 850.

There are several other scoring methods such as VantageScore 3.0. Although this method isn’t a “true” FICO score, but both methods offer some similarities in calculating credit scores.

Factors that determine credit score includes

  • Borrower’s payment history.
    • Your debt amount
    • Your length of credit history
    • Your new accounts and their type (mortgages, credit cards, auto loans, etc).

Considering the above factors, here are five ways to improve your credit score and get the most competitive interest rates.

  1. Remove late payments and errors from your credit history

A good credit report boosts your chance to get the most competitive interest rates. Go through your reports and if you find any inaccurate late payments, mail a dispute to the creditor and the credit bureaus (Equifax, Experian, and TransUnion).

  1. Pay off the debt you owe to reduce your credit utilization.

Revolving utilization, (the 2nd most impactful factor) is also known as credit utilization or “debt-to-limit ratio.”  This ratio measures the percentage of your revolving credit that you are using currently.

To get your credit utilization, simply divide your credit card balance by your card limit and multiply by 100. If your ratio is above 30 percent, you need to pay off some debt to reduce your revolving credit utilization.

  1. Raise your card credit limit

Besides paying off debt balance, you may request your creditor to increase your card limit or open up a new credit card account. For example, if you opt to raise your card limit by $1,000, your revolving utilization would drop to 35%.

  1. Go for credit piggybacking

If you desire to build a good credit history, credit piggybacking is the best option. Under this option, you become an authorized user on someone else card who has an excellent credit history. Basically, Credit piggybacking is a shortcut to show up your excellent credit history. Be aware of this as it can also negatively effect your score should the borrower not make their payments.

  1. Use a credit-builder loan

Under credit-building loan, you don’t receive cash upfront, but it is held in your savings account out of which you make your installment payments. This type of loan is much similar to a personal loan. After satisfying the loan requirements, you receive the lump sum amount plus interest income earned from your savings account.

Should you have any questions about your credit, need budgeting or credit restoration assistance, please contact United Financial Counselors.  Schedule an appointment today on our website, United Counselors.